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Does ESG reduce financial distress risk? Evidence from economic downturns

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  • Song, Xianwei
  • Yuan, Dan
  • Chen, Ling

Abstract

This study examines whether environmental, social, and governance (ESG) performance is associated with a lower risk of corporate financial distress, particularly during periods of macroeconomic stress. Using an unbalanced panel of Chinese A-share listed firms from 2014 to 2023, we analyze the relationship between ESG performance and financial distress measured by the Altman Z-score and Ohlson O-score using firm and year fixed-effects models. The results show that firms with stronger ESG performance exhibit significantly lower risk of financial distress. This association increases in the post-2020 period, suggesting that ESG primarily serves as a downside risk buffer rather than a driver of superior performance in normal periods. Further analysis indicates that the risk-mitigating role of ESG is stronger for firms audited by Big 4 auditors and for firms with stronger board monitoring, and is concentrated among nonstate-owned enterprises facing greater market discipline.

Suggested Citation

  • Song, Xianwei & Yuan, Dan & Chen, Ling, 2026. "Does ESG reduce financial distress risk? Evidence from economic downturns," Finance Research Letters, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:finlet:v:105:y:2026:i:c:s1544612326007373
    DOI: 10.1016/j.frl.2026.110209
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